Tax zone program stirs new debate

Between 1998 and 2012, special taxing districts paid for at least $50 million worth of improvements in some of San Antonio’s poorest neighborhoods — for affordable housing, sidewalks, streets and even a railroad quiet zone, without one penny of it coming from the city’s general fund.

In the program’s first decade, more than two dozen of these districts — known as Tax Increment Reinvestment Zones, or TIRZ — were born, most of them initiated by private developers in parts of town that had seen little new construction.

But until last week, not a single zone had been created in the past six years. Developers say the tax districts are too much trouble — too much work and money, with no guarantee of a return.

Looking to revamp the struggling program after the release of a blistering internal audit earlier this year, city officials want to allow the zones in better-off neighborhoods, not just the ones burdened by crime and blight.

Tax zone program stirs new debate

1of7The Phipps office building along the Museum Reach of the River Walk.Photo: Spencer Selvidge /For the Express-News

2of7The empty pool of the Red Berry Mansion at 856 Gembler Rd. near the ATT Center is part of a redevelopment plan that calls for residential and commercial development.Photo: Robin Jerstad, Freelance

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Developers, though, want the city to go much further than that — they not only want more leeway in where a tax district is created, they want the chance to capture more dollars through the program.

The big question hanging over the reform efforts is, will it discourage development in poorer communities if the city expands where a TIRZ can be created?

City staffers had been ready to take their proposed changes to the City Council on Thursday — until they met with several groups, including the Real Estate Council of San Antono and Centro San Antonio. Both sought greater revisions than staffers were pushing.

The way the program stands today, “I don’t foresee anyone creating a new one anytime soon if it’s not a workable tool,” said Rob Killen, an attorney representing the Real Estate Council.

Under the current rules, the poorer the neighborhood and the worse the unemployment rates and poverty levels, the more likely it is to qualify for a tax district.

The city’s proposing that “market-ready” parts of town — middle-class neighborhoods poised for new development that just hasn’t arrived yet — also be eligible for the designation.

Perrin Beitel on the Northeast Side is a good example. The corridor has struggled to attract commercial and retail developers, yet is seen to be on the verge of revitalization.

On Thursday, the council created the Northeast Corridor TIRZ, centered around Perrin Beitel. Because the corridor isn’t deemed poor enough, it wouldn’t have qualified for a TIRZ designation under the existing rules. Council members approved the new district in anticipation of the rule change.

“There are some neighborhoods that may be just emerging that are almost ready for the private sector to invest in,” said John Dugan, director of the city's Planning and Community Development Department, who noted the revised rules would only apply to new tax districts. “They might not be the worst neighborhoods … but with a little bit of financing from TIRZ, a little push, they might be more viable.”

But with the new rules, the city could make it impossible for smaller tax districts — those that often focus on developing affordable housing — to get off the ground, said TIRZ consultant Lance Elliott. Instead, the city would focus on “giant TIRZs that will generate the kind of revenue we need to support the TIRZ department.”

Along with reforming the eligibility rules, the city also wants to raise the annual fees collected from each district, so each one pays its own administrative costs.

“You’ve got six to eight TIRZ employees (at the city) that have to be paid,” said Elliott, who worked on development of the Rosedale TIRZ on the West Side, which was for affordable housing. The only way you can pay them, he said, “is if you’ve got giant TIRZs that are generating very large annual payments.”

Councilman Keith Toney, who voted in favor of the Northeast Side zone, said he doesn’t mind changing the program so more areas are included. He just doesn’t like the idea of different projects competing against each other.

“We would have to, in effect, compete with outer, well-heeled neighborhoods to the north,” Toney said.

How it works

After a district’s boundaries are marked off, developers pay for infrastructure improvements — such as sidewalks or landscaping — up front, hoping their work will attract even more development, causing property values to go up. The additional property tax revenue generated in the area goes into a fund, from which the developers will be reimbursed.

San Antonio currently is home to 20 TIRZs, some small and some big, some wildly successful and others that have generated very little money. It’s difficult to predict what will pay off and what won’t.

Examples of what special-district dollars have paid for include:

On the East Side, wrought-iron fencing at cemeteries.

Along the Museum Reach segment of the River Walk, reimbursement to the builders of an apartment complex, an office building and a hotel.

At Brooks City Base, the funds back bonds that pay for roads and sidewalks.

A district also is responsible for the West Side neighborhood off General McMullen where Maricela Garza has made her home for the past 15 years. Before the houses were built, this was 28.5-acres of woody, weedy, vacant land. Garza, 56, lived in low-income apartments nearby.

Then her niece brought her a flier about classes at an area church for first-time homebuyers. Garza signed up. Soon, she was moving into her first home, inside the Rosedale tax zone. She’s paid about half of the $63,000 on the home, modest in size but with three bedrooms and a front porch. The porch is crowded with potted plants, bird houses and figurines.

Buying a home helped Garza improve her credit.

“This has opened doors for me,” Garza said. “You go anywhere and you say you’re a homeowner,” and people pay attention.

There were 64 affordable homes built in the Rosedale zone, one of the first in the city. District money also paid for the development of a linear park along nearby Zarzamora Creek that was once overgrown and trash-strewn.

The idea was to create “affordable housing for working families,” said Rod Radle, who worked with Lance Elliott on the Rosedale zone, developing it through his nonprofit San Antonio Alternative Housing Corporation.

But Radle fears the tax-district program already has strayed from the purpose of creating better housing in places where little good housing stock exists.

“I think the main thing that concerns me is that we have not utilized TIRZ in a very proactive way for affordable developments,” Radle said. “Often the TIRZ are looked at as a cash resource for generating extra funds and not necessarily focusing on the public purpose.”

In flux

But the city’s plan is to “expand the geography” of the program, “not to lose the high poverty areas, because they’re all still eligible,” said Dugan, the city’s planning director.

While the current rules focus on areas with high health risks, low education and income levels, the city wants to add a host of additional considerations: has there been recent development, what are the rental and occupancy rates, is there development potential and is an area considered “emerging”?

“We think every inner-city district probably has some emerging markets,” Dugan said.

He believes there are as many as a dozen corridors like Perrin Beitel, surrounded by a stable middle or working class but with depressed commercial areas.

That includes neighborhoods like Five Points, just northwest of downtown; areas farther northwest, such as Wurzbach Road near Interstate 10; and areas farther west, like Texas 151 between U.S. 90 and Loop 410.

“The bigger question is, where do we want investment and redevelopment to take place? Only in the highest poverty, core of the city, or in other parts of the city like Perrin Beitel?” Dugan said.

“We often don’t talk about the fact that some of the inner-ring suburbs are starting to experience the kind of decline we’ve seen in the inner city over the years,” Taylor said.

District 4 Councilman Rey Saldaña, who also voted for the tax district, agrees with Taylor and Dugan, that some suburban areas could use a TIRZ. But he’s still concerned the program’s direction could result in developers all but abandoning poorer neighborhoods for better-off communities where there might be less risk.

“If there are only 10 developers who want to do projects in the city, they will look at the areas that will generate quicker return on their investment,” said Saldaña, who represents the slow-growing Southwest Side.

Too restrictive?

But, until last week’s council vote, not a single zone had been created — by either the city or a developer — since 2008, when the city adopted the most stringent guidelines to date.

The rules favor projects in the kinds of neighborhoods Radle would want to see targeted, with low education levels and high poverty rates.

“It became so restrictive and difficult because of that policy that no one has adopted one,” Dugan said, explaining why the city is revising the rules again.

Developers want more flexibility and more certainty, said Killen, the Real Estate Council attorney. Other city incentive programs, such as the Center City Housing Incentive Policy, offer developers a clear idea of what incentives they can receive. The tax-district program does not, he said.

“It should be user-friendly, it should be easily understood,” Killen said.

The Real Estate Council also doesn’t want limitations on where a developer-initiated zone could be located. Rather than be limited to poor neighborhoods or emerging markets, Killen said, the entire city should be eligible for that kind of program because there are infrastructure needs across the city.

The Real Estate Council and Centro San Antonio also are asking the city to increase the pot of money available to reimburse developers for improvements by capturing sales tax revenue in the districts, not just property taxes.

For his part, Centro San Antonio CEO DiGiovanni has recommended the city considering issuing bonds to pay for projects and then repay the debt with the additional tax revenue generated in the zones — something the city has said is too risky.

Both groups also have a big problem with the proposed administrative fee increases.

The city is looking to create a tiered fee system that would require tax zone boards to annually pay $45,000, $75,000 or $120,000, depending on the complexity of the zone, or 20 percent of the yearly excess tax revenue — whichever amount is less.

Last week, Dugan told council members the Northeast Corridor TIRZ, which is city-initiated, is expected to generate $6 million over 20 years, or about $300,000 a year. Under the proposed fee system, 20 percent of that amount — about $60,000 — would go back to the city to pay for administrative fees every year.

Developer-initiated districts shouldn’t be subject to the same high fees as one created by the city, which Killen said “tend to be larger and tend to occupy more staff resources.”

Radle, the affordable-housing developer, has asked the city to cap the fees at 5 percent for developments where more than half the homes are affordable.

Balancing act

Dugan remains optimistic the city can come up with a better way to foster development in parts of the city where it’s needed most.

The planning department also is looking at creating a type of special district that combines a booming market with a distressed market, so one can benefit the other.

Take the existing Inner City TIRZ, which includes public housing and blight but also captures several downtown hotels, including the Grand Hyatt. The revenues that have benefited that zone, one of the city’s most successful, are coming from the thriving areas, but the benefit is spread around.

That largely was by design. The board decided to put some of the money generated by the district toward economic-development projects while other funds go to “social capital projects,” said Juan Garcia, a member of the Inner City TIRZ board and former president of the Dignowity Hill Neighborhood Association.

“You’re not going to be able to keep your TIRZ board going unless you collect the increment from the larger business areas,” said Mario Salas, former District 2 councilman who helped spearhead creation of the Inner City TIRZ in 2000 and was recently elected its chairman.

“It’s a balance,” he said. “It isn’t a perfect balance in my mind, but then nothing ever is.”